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Retirement Accounts

Individual Retirement Accounts

Traditional Individual Retirement Account (IRA) - Money is put into this tax deferred, and money put in can sometimes be deducted from an individual's yearly income.  See the flowcharts for rules specific to your situation. 


Roth IRA - Money is put into this after tax and grows tax free. However, for a single individual making more than $144,000 or a married couple making more than $214,000 (2022 rules), no money can be contributed to a Roth. 


There is a combined traditional and Roth IRA yearly contribution limit of $6,000 for those under 50 and $7,000 for those over 50.  For example, a 35 year old could put $3,500 into a traditional IRA, but then could only contribute $2,500 to a Roth IRA.  There is a 6% tax penalty for exceeding the maximum contribution. 


Simplified Employee Pension IRA (SEP IRA) - SEP IRA's allow employers to contribute money tax deferred into retirement plans for their employees.  Employers can contribute up to the lesser of 25% of an employee's wages or $61,000. Like traditional IRA's, there is a 10% penalty for withdrawing money before age 59.5.  


SIMPLE IRA - An employer with 100 or fewer employees can establish a SIMPLE IRA.  An employee who earned at least $5,000 in two preceding years can contribute up to $14,000, and the employer can choose to either match the contribution (up to 3% of the employee's salary) or to make a 2% contribution to all eligible employees.  All money contributed to SIMPLE IRA's is tax deferred. 


Traditional 401(k) - These are employer-sponsored plans where an employee puts in money tax deferred, and the employer matches part or all of the contribution.  The money contributed by the employee is taken directly from his or her salary and therefore is deducted from his or her income. 


Roth 401(k)- These are employer-sponsored plans where an employee puts in after-tax money, and the employer matches part or all of the contribution.  An employee may choose a Roth 401(k) over a traditional 401(k) if he or she will be in a higher income bracket during retirement.


As with IRAs, there is a combined traditional and Roth 401(k) yearly contribution limit.  For those under 50, there is a yearly contribution limit of $20,500.  For those 50 or older, there is a yearly contribution limit of $27,000.  Employer contributions do not count towards this limit.

IRA and 401(k) Distributions

For any account that contains after-tax money (Roth IRAs and Roth 401(k)s), you must wait 5 years before you can take a qualified distribution on earnings.  However, the principal put into an after-tax account can be taken out anytime without a tax penalty - you just won't make any gains on the money withdrawn, and the yearly contribution limit remains the same.

For all IRAs and 401(k)s, there is a 10% penalty for withdrawals before age 59.5, unless the money is withdrawn for medical expenses, higher education expenses, or the owner of the account becomes disabled or passes away.  For all IRA's, money can be withdrawn penalty free for buying a first home (up to $10,000). 

For traditional, SEP, and SIMPLE IRAs, there is a required minimum distribution (RMD) starting at age 70.5.  If an individual does not take an RMD at this age, there is a 50% tax penalty on what the individual should have taken out.  Roth IRAs have no RMD because the money put in has already been taxed.

Defined Benefit Plans

All 401(k)s are considered defined contribution plans because the employee and employer contribute a specific amount each year, and the employee gets whatever money is in the plan when he or she retires.  Defined benefit plans work the opposite way; the employee will receive a specified amount of money as a pension in retirement.  The contribution required for this benefit is calculated, and the employer, the employee, or both contribute that amount.  The maximum yearly benefit is $245,000.

Taxes are paid for defined benefit plans when and individual receives the benefits; any money received counts as earned income.  Additionally, any money contributed to the plan by an employee is deducted from an individual's income.

Health Savings Accounts

A Health Savings Account (HSA) is a tax exempt trust set up to pay for certain medical expenses.  In order to qualify for an HSA, an individual must have a high deductible health plan, i.e. a plan with an individual deductible of at least $1,400 and/or a family deductible of at least $2,800.  Contributions made to an HSA are tax deductible, any earnings made are tax free, and distributions are tax free if they are used for qualified medical expenses.  In general, medical care, prescription drugs, and long term care count as qualified medical expenses.

There is a maximum yearly HSA contribution of $3,600 for individuals and $7,200 for families.  For those over 55, the maximum contributions are $1,000 higher.  Any benefits received that are not used for qualified medical expenses are subject to a 20% tax penalty.

If you have any questions or would like to learn more about retirement accounts, please contact us.

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